Question

Seven metrics

The following data were taken from the financial statements of Woodwork Enterprises Inc. for the current fiscal year. Assuming that there are no intangible assets.

Property, plant, and equipment (net)						$1,689,600
Liabilities:
	Current liabilities			$210,000
	Mortgage note payable, 10%, ten-year note issued two years ago			1,056,000
	Total liabilities					$1,266,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$949,500
	Common stock, $10 par (no change during year)					949,500
Retained earnings:
	Balance, beginning of year	$1,012,000
	Net income	391,000		$1,403,000
	Preferred dividends	$37,980
	Common dividends	99,020		137,000
	Balance, end of year					1,266,000
Total stockholders' equity						$3,165,000
Sales						$9,047,200
Interest expense						$97,160
Beginning-of-the-year amounts:
	Property, plant, and equipment (net)					$ 2,216,000
	Total assets					4,209,000
	Retained earnings					1,012,000

Determine the following: (a) debt ratio, (b) ratio of fixed assets to long-term liabilities, (c) ratio of liabilities to stockholders’ equity, (d) asset turnover, (e) return on total assets, (f) return on stockholders’ equity, and (g) return on common stockholders' equity. Round to two decimal places.

a.	Debt ratio	%
b.	Ratio of fixed assets to long-term liabilities
c.	Ratio of liabilities to stockholders’ equity
d.	Asset turnover
e.	Return on total assets	%
f.	Return on stockholders’ equity	%
g.	Return on common stockholders’ equity	%

Answer 1

a) Debt Ratio = Total Debt/Total Assets

Total Debt = Mortgage Note Payable = $1,056,000

Total Assets at the end = Total Liabilities+Total Stockholder's Equity

= $1,266,000+$3,165,000 = $4,431,000

Debt Ratio = $1,056,000/$4,431,000 = 0.2383 (i.e. 23.83%)

Therefore the debt ratio of the company is 23.83%

b) Ratio of fixed assets to long-term liabilities = Fixed Assets/Long term debt

Fixed Assets = Property, plant, and equipment = $1,689,600

Long term debt = $1,056,000

Ratio of fixed assets to long-term liabilities = $1,689,600/$1,056,000 = 1.60

c) Ratio of liabilities to stockholders’ equity = Total Debt/Stockholder's Equity

Total Debt = $1,056,000

Stockholder's Equity = $3,165,000

Ratio of liabilities to stockholders’ equity = $1,056,000/$3,165,000 = 0.33

d) Asset Turnover = Net sales/Average Total Assets

Net Sales = $9,047,200

Average Total Assets = (Opening Assets+Closing Assets)/2

Opening Assets = $4,209,000

Closing Assets = $4,431,000

Average Total Assets = ($4,209,000+$4,431,000)/2 = $8,640,000/2 = $4,320,000

Asset Turnover = $9,047,200/$4,320,000 = 2.09 times

e) Return on Total Assets = (Net income before interest/Total Assets)*100

Net income before interest = Net Income+Interest Expense

= $391,000+$97,160 = $488,160

Total Assets = $4,431,000

Return on Total Assets = ($488,160/$4,431,000)*100 = 11.02%

f) Return on stockholders’ equity = (Net Income/Stockholder's Equity)*100

Net Income = $391,000

Stockholder's Equity = $3,165,000

Return on Stockholder's Equity = ($391,000/$3,165,000)*100 = 12.35%

g) Return on Common Stockholders’ Equity

= (Net income available for common stockholders/Common stockholder's equity)*100

Net income available for common stockholders = Net income - Preferred Dividends

= $391,000 - $37,980 = $353,020

Common Stockholder's Equity = Common Stock+Retained Earnings

= $949,500+$1,266,000 = $2,215,500

Return on Common Stockholders’ Equity = ($353,020/$2,215,500)*100 = 15.93%